News Comment/COMENTARI AL DIA

OPEC and Russia Bankrupt/OPEP I RÚSSIA EN FALLIDA

OPEC and Russia Bankrupt

From Ferraris for the superrich to budget crisis in Saudi Arabia. Oil rich Houston lookalikes in Moscow but on closer look the skyscrapers are unfinished and construction stopped.

Oil prices have kept up despite the world financial crisis because OPEC and Russia are virtually bankrupt. They depend on high oil prices to pay for out of control budgets. These high oil prices are stimulating the development of alternative productions like the Canadian oil sands that will eventually break up the oil cartel.

OPEC’s pursuit of higher prices has underpinned the growth of non-OPEC producers. OPEC keeping the price of oil high is making all the exotic and expensive sources of oil economically viable. Of course, the cartel’s oil policies are driven by domestic politics. Middle East producers, which dominate OPEC, enjoy low crude development costs but need higher oil prices to fulfill their increasing commitments to their restive populations. On the surface, Saudi Arabia, the world’s largest producer of oil and OPEC kingpin, has a breakeven cost price of $22.11 per barrel. However, that does not paint the full picture of the cost of keeping Saudi Arabia’s monarchy in power. Deutsche Bank’s Budget Break-even Price factors in the price needed to balance the budget to pay for public wages, infrastructure and subsidies. The Saudi budget’s breakeven price for 2012 stands at $78.30. The kingdom’s breakeven price escalated as it injected petrodollars to stimulate its limping economy after the global financial crisis; it also opened its coffers to appease its citizens after the Arab Spring in neighbouring Egypt, Tunisia, Libya, Yemen and Bahrain. Fearing a popular revolt, King Abdullah pledged 30% of its GDP, public sector jobs for 60,000 and double-digit wage hikes for existing government employees to keep dissent at bay. Unlike investment spending which can be scaled back, current spending involves wage bills which are far more sensitive to changes, especially if they are revised downwards. The Saudi wage bill has risen 76% in six years. These costs are effectively now baked into what price suits its domestic needs. The pressure on breakeven prices is, if anything, likely to be upwards rather than downwards. Saudi Arabia sitting on $500 billion in cash reserves has staying power in the event of an oil price crash, unlike Venezuela with a breakeven price of $86.72. Even Russia, the world’s largest non-OPEC producer, needs crude to average $115.90 to balance its budget. The politics and economics of crude mean none of the major producers can handle a period of sustained low prices: Saudi Arabia, Russia and Venezuela need to meet demands of their dissenting citizens, Iran to counter sanctions and Iraq to fulfill its long-term desire of being a major crude producer.